Grant Schools Provident Fund
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Annual Report 2018
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OTHER INFORMATION
Funds Section Education Bureau
Ms LAM Wing-hop, Sandy Senior Accounting Officer
Room 1517, 15/F Wu Chung House 213 Queen’s Road East
Wanchai Hong Kong
Secretary
Ms HON Hin-yan Education Officer
School Administration Division Education Bureau
5/F, East Wing, Central Government Offices 2 Tim Mei Avenue
Tamar Hong Kong
Treasurer
Ms LEUNG Yin-fun, Fanny
Assistant Director of Accounting Services The Treasury
Room 2701, 27/F, Immigration Tower 7 Gloucester Road
Wanchai Hong Kong
Auditor
Mr John CHU, JP Director of Audit
26/F, Immigration Tower 7 Gloucester Road Wanchai
Hong Kong
CONTENTS PAGE
Foreword 1
Board of Control 4
Investment Sub-committee 7
Chairman’s Report 9
Treasurer’s Report 11
Number of Contributors (2009 – 2018) 17
Dividend Declared and Investment Return (2009 – 2018) 18
Net Assets (2009 – 2018) 19
Spread of Net Assets 20
Report of the Director of Audit 21
Balance Sheet 24
Income and Expenditure Account 25
Reserve Fund 26
Statement of Changes in Net Assets Available for Benefits 27
Statement of Cash Flows 28
Notes to the Financial Statements 29
FOREWORD
The Fund
The Grant Schools Provident Fund (The Fund) is governed by the Grant Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279).
The Fund is a defined contribution retirement scheme established to provide for payments upon retirement, resignation, dismissal, termination of contract or death of contributors.
Contributors refer to teachers in grant schools and also, with effect from 19 May 2000, teachers in Direct Subsidy Scheme (DSS) schools who contribute to the Fund.
Board of Control
The complete administration and control of the Fund, subject to the Fund Rules, is vested in the Board of Control, the composition of which is as follows:
Chairman : nominated by the Grant Schools Council Vice-chairman : nominated by the Grant Schools Council
out of the 8 additional members Permanent Secretary for Education or his representative Director of Accounting Services or his representative Eight additional members :
(a) 2 nominated jointly by contributors who are members of the staff of Roman Catholic boys schools in Hong Kong,
(b) 2 nominated jointly by contributors who are members of the staff of Roman Catholic girls schools in Hong Kong,
(c) 2 nominated jointly by contributors who are members of the staff of the Diocesan Boys’ School, the Diocesan Girls’ School, St. Paul’s Co-educational College, St. Paul’s College and St. Mark’s School, (d) 1 nominated jointly by contributors who are members of the staff of
Ying Wa College, Ying Wa Girls’ School and the Methodist College, and
(e) 1 nominated jointly by contributors who are members of the staff of St. Stephen’s Girls’ College and Heep Yunn School.
Meetings of the Board of Control
The Board holds an annual general meeting to receive and consider the annual financial statements of the Fund and to declare the annual dividend for contributors. It also holds other meetings during the year as and when required. Five members form a quorum. All matters arising before any meeting of the Board are determined by a majority of the members present and voting thereon.
Contributions and donations
Contributors’ contributions and the matching donations from the Government and DSS schools are made monthly to the Fund according to the following scale as a percentage of a contributor’s basic salary, including any approved allowance:
No. of years of continuous contributory service
Teacher’s contribution
Donations from the Government and
DSS schools
% %
Less than 10 5 5
10 to less than 15 5 10
15 or more 5 15
Benefits
Contributors are entitled to a lump sum payment when they cease to be contributors to the Fund. Subject to certain exceptions laid down in the Fund Rules, the amount of payment is determined as follows :
Length of contributory service Benefits
10 years or more All accumulated contributions and donations from the Government and DSS schools and dividends thereon.
5 years to less than 10 years All accumulated contributions and dividends thereon and 10% of the donations from the Government and DSS schools and dividends thereon for each complete year of contributory service.
Less than 5 years All accumulated contributions and dividends thereon.
Statement of provident fund account balance
Each contributor is provided by the Treasurer of the Fund with a statement of provident fund account in September and March each year. These statements show the balance standing to the credit of each contributor’s account at the previous 31 August and 28 February (or 29 February as appropriate) respectively. The March statement
incorporates the latest annual dividend declared by the Board for the year ended the previous 31 August. The supervisor of each school also maintains a provident fund account for each contributor in his school and these accounts are available for inspection by contributors.
Payments to outgoing contributors
Except for the peak months of August and September, payments of benefits to the outgoing contributors are made by the Fund within 23 working days from the date of receipt of the outgoing contributor’s application by the Permanent Secretary for Education or the effective date of ceasing to be a teacher, whichever is later. Payments are made by the Fund within 28 working days for the two peak months. Both pledges are subject to the condition that the withdrawal application is correctly completed by the outgoing contributor.
Investment Management
The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under rule 6(1) of the Grant Schools Provident Fund Rules. The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary. All sum considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.
An Investment Sub-committee is formed by the Board and meets on a quarterly basis to:
(a) review the investments made and to verify that they were made within the approved framework and strategy of the Fund,
(b) interview investment managers regarding their performance and obtain their views on various financial markets, and
(c) discuss and formulate investment strategies for recommendations to the Board of Control.
Accounts and audit
Apart from other duties described in the Fund Rules, the Treasurer maintains proper accounts and records of all transactions of the Fund and prepares the annual financial statements for audit by the Director of Audit. The audited financial statements together with the auditor’s report are placed before the Board at the annual general meeting.
GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL
Back Row Front Row
(From Left to Right) (From Left to Right)
1. Mr WAI Wing-yin, Eric 1. Mr CHENG Kwun-kit, Allan 2. Ms LEE Kam-ha, Melaine 2. Dr SO Ying-lun
3. Mr TONG Wun-sing 3. Mr WONG Shing-hei, Charlix, JP 4. Mr TSO Yan-chung, Mikel 4. Ms LEUNG Yin-fun, Fanny (Treasurer) 5. Ms HON Hin-yan
Not in the picture 1. Mr AU Man-hin
2. Ms LAM Yuen-fan, Fanny 3. Mr LEUNG Wai-kit, Ricky
GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL
1.9.2017– 31.8.2018
Chairman
Dr SO Ying-lun Wah Yan College, Hong Kong
Vice-Chairman Mr CHENG Kwun-kit, Allan Ying Wa College
Members
Mr AU Man-hin Diocesan Girls’ School
Ms LAM Yuen-fan, Fanny Heep Yunn School
Ms LEE Kam-ha, Melaine Maryknoll Convent School Mr LEUNG Wai-kit, Ricky St. Mark’s School
Mr TONG Wun-sing La Salle College
Mr TSO Yan-chung, Mikel (From 28.9.2017)
St. Mary’s Canossian College Mr WAI Wing-yin, Eric Wah Yan College, Kowloon
Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board Mr SIU Man-tat, Martin, JP
(Up to 2.1.2018)
Mr WONG Shing-hei, Charlix, JP (From 3.1.2018)
Director of Accounting Services
Director of Accounting Services
GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL
From 1.9.2018
Chairman
Dr SO Ying-lun Wah Yan College, Hong Kong
Vice-Chairman Mr CHENG Kwun-kit, Allan Ying Wa College
Members
Mr AU Man-hin Diocesan Girls’ School
Ms LAM Yuen-fan, Fanny Heep Yunn School
Ms LEE Kam-ha, Melaine Maryknoll Convent School Mr LEUNG Wai-kit, Ricky St. Mark’s School
Mr TONG Wun-sing La Salle College
Mr TSO Yan-chung, Mikel St. Mary’s Canossian College Mr WAI Wing-yin, Eric Wah Yan College, Kowloon
Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board Mr WONG Shing-hei, Charlix, JP Director of Accounting Services
GRANT SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE 1.9.2017 – 31.8.2018
Chairman
Dr SO Ying-lun Wah Yan College, Hong Kong
Members Mr CHENG Kwun-kit, Allan Ying Wa College
Mr LEUNG Wai-kit, Ricky St. Mark’s School
Mr WAI Wing-yin, Eric Wah Yan College, Kowloon Mr SIU Man-tat, Martin, JP
(Up to 2.1.2018)
Mr WONG Shing-hei, Charlix, JP (From 3.1.2018)
Director of Accounting Services
Director of Accounting Services
Treasurer
Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services
Secretary
Ms Tse Yuk-lin, Cathy Treasury Accountant
GRANT SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE From 1.9.2018
Chairman
Dr SO Ying-lun Wah Yan College, Hong Kong
Members Mr CHENG Kwun-kit, Allan Ying Wa College
Mr LEUNG Wai-kit, Ricky St. Mark’s School
Mr WAI Wing-yin, Eric Wah Yan College, Kowloon Mr WONG Shing-hei, Charlix, JP Director of Accounting Services
Treasurer
Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services
Secretary
Ms TSE Yuk-lin, Cathy Treasury Accountant
CHAIRMAN’S REPORT
(Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.) Dividend
I am pleased to report that at the annual general meeting held on 16 January 2019, the Board of Control (BoC) declared a guaranteed dividend of 5% for contributors for the year ended 31 August 2018.
Contributors’ Account
During the year, 121 new contributors joined the Fund and 101 withdrew from it.
These figures include 49 transfers in from and 36 transfers out to the Subsidized Schools Provident Fund. The total number of contributors increased by 20 or 1.74% to 1,169. The balance of the contributors’ account increased by HK$118.0 million or 3.97% to HK$3,090.2 million. The service profile of contributors who withdrew from the Fund during the year was as follows:
2018 2017
Below 10 years 26% 33%
10 to 15 years 10% 9%
Above 15 years 64% 58%
Net Assets and Management Cost
As at 31 August 2018, the net assets of the Fund amounted to HK$3,787.8 million. The cost of managing the Fund by way of supervision fee paid to Government, fees of investment managers, fees of custodians, investment transaction costs and other operating expenses was HK$9.1 million – equivalent to 0.24% of the Fund’s net assets.
Major Activities of the Board of Control
At the annual general meeting held on 29 January 2018, the BoC adopted the annual
statement of accounts of the Fund and declared a dividend of 5% for the year ended 31 August 2017.
The BoC also approved the following matters during the year ended 31 August 2018:
(a) the Fund’s investment plan for the year;
(b) the Fund’s supervision fee budget for the year; and
(c) appointment of an investment consultant to conduct the investment strategies review.
Vote of Thanks
Mr SIU Man-tat, Martin, JP ceased to be a member of the BoC during the year. On behalf of the BoC, I thank him for his invaluable contributions to the work of the BoC in the past year.
Financial Highlights for the year ended 31 August 2018
2018 2017 Changes
Contributors’ Account (a) 3,090.2 2,972.2 +3.97%
Net Assets (b) 3,787.8 3,621.6 +4.59%
Management Cost
(as a percentage of net assets)
9.1 (0.24%)
8.0 (0.22%) Reserve Level at year end (%)
－ before the year’s dividend [(b)-(a)]/(a) above
22.57 21.85
－ after the year’s dividend 16.74 16.04
Investment Return for the year (%) 5.52 11.44
Total Dividend Declared (%) 5.00 5.00
Number of Contributors 1,169 1,149 +1.74%
Performance Indicator
2018 2017
Proportion of cases of withdrawal paid within 23 working days for October to July or 28 working days for peak months of August and September
100.00% 100.00%
Dr SO Ying-lun
Chairman Board of Control
Grant Schools Provident Fund 16 January 2019
GRANT SCHOOLS PROVIDENT FUND
TREASURER’S REPORT FOR THE YEAR ENDED 31 AUGUST 2018 (Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.)
1. FINANCIAL STATEMENTS
The financial statements of the Fund have been drawn up in accordance with accounting treatments stipulated in the Fund Rules and accounting principles generally accepted in Hong Kong.
2. FINANCIAL RESULTS (i) Overall Surplus
The Fund recorded an overall surplus of HK$196.0 million for the year as follows:
Operating surplus 75.5
Net realised and revaluation gains 120.5
Overall surplus 196.0
(ii) Investment Return
The overall surplus represented an investment return of 5.52% (2017:
overall surplus of 11.44%) of the Fund for the year.
(iii) Asset Cover/Reserve Level - Before the year’s dividend
The financial strength of a defined-contribution scheme is measured in terms of its asset cover (or reserve level), i.e. the adequacy of its assets to meet the benefits payable to scheme members.
The Fund’s net assets covered its liability (represented by the year-end balance of the contributors’ account before provision for the year’s dividend) by 1.23 times, providing a reserve level of 22.57% as follows:
Net Assets (a) 3,787.8 Less: Contributors’ Account
(before the year’s dividend) (b) 3,090.2
Reserve (c) 697.6
Asset Cover (a)/(b) 1.23 times (2017 : 1.22 times) Reserve Level (c)/(b) 22.57% (2017 : 21.85%)
3. DIVIDEND CALCULATION FOR THE YEAR
The Board has agreed to determine each year’s annual dividend on the basis of the level of reserve held by the Fund at year end and the investment return actually achieved on the Fund’s assets during the year by way of a dividend formula.
The dividend formula comprises two components:
〈--- (a) ---〉 〈--- (b) ---〉
（Reserve Level － 40%）÷（1 ＋ 40%）＋（Fund Return × Adjusted Reserve Level）
where Reserve Level refers to Pre-dividend Reserve Level and the total dividend is subject to a minimum of 5%.
(a) - provides for releasing the excess over the target Pre-dividend Reserve Level of 40%. This component will be zero if the Reserve Level is 40%
or less.
(b) - provides for releasing a portion of investment return based on the Reserve Level. If the Reserve Level is 40% or less, then the Adjusted Reserve Level is simply the Reserve Level. If the Reserve Level is above 40%, then the Adjusted Reserve Level is 40%.
The dividend formula comes up with a dividend rate of 1.25%. Since the calculated annual dividend is below 5%, the dividend for this year shall be the guaranteed 5%. The dividend calculation has been audited by the Director of Audit.
4. DECLARATION OF THE GUARANTEED DIVIDEND AND TRANSFER FROM THE RESERVE FUND
I recommend that the Board:
(a) transfer a sum of HK$79.0 million from the Reserve Fund to the Income and Expenditure Account in accordance with rule 11(3) of the Grant Schools Provident Fund Rules, and
(b) declare a guaranteed dividend of HK$154.5 million out of the Income and Expenditure Account which will be distributed as follows:
(i) a credit of 5% in respect of each contributor’s account which is open for the entire financial year commencing 1 September 2017 as the guaranteed dividend in accordance with rule 12(1), and
(ii) a credit of pro rata dividend in respect of each contributor’s account which is not open for the entire financial year commencing 1 September 2017 in accordance with rule 14.
The above appropriations have been incorporated in the financial statements.
5. ASSET COVER / RESERVE LEVEL - After the year’s dividend
After provision for the total dividend of 5% for the year, the asset cover of the Fund stood at 1.17 times and the level of reserve at 16.74% as follows:
Net Assets (a) 3,787.8
Less: Contributors’ Account (after the year’s dividend):
Contributors’ Account 3,090.2
Provision for the year’s dividend 154.5
(b) 3,244.7
Reserve (c) 543.1
Asset Cover (a)/(b) 1.17 times (2017 : 1.16 times)
Reserve Level (c)/(b) 16.74% (2017 : 16.04%)
6. INVESTMENT OBJECTIVE AND CRITERIA
The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.
The Fund is governed by an investment framework approved by the Financial Secretary. The framework sets down broad limits for various classes of investment and defines the quality or credit rating of individual types of securities permitted for investment. All investment decisions of the Fund are made within this framework.
7. INVESTMENT RESPONSIBILITIES
Each year the Board of Control approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.
Investment of funds is the responsibilities of the Treasurer and the Fund’s external investment managers. The Treasurer has the additional responsibility of providing investment guidelines to the investment managers and, with the assistance of the custodians, ensuring that their activities are in compliance with these guidelines.
8. INVESTMENTS
As at 31 August 2018, the Fund’s investment portfolios amounted to HK$3,761.1 million of which HK$2,957.9 million or 78.64% was placed under the management of external investment managers. The distribution of the investments in proportion terms was as follows:
Managed by
Managed by Investment
Investments Treasurer Managers Overall
% % %
Equity securities listed in Hong Kong － 17.27 17.27 Debt securities denominated in Hong
Kong dollar
0.76 9.77 10.53
Hong Kong dollar fixed deposits 13.41 － 13.41
Equity securities listed outside Hong Kong
－ 34.99 34.99
Debt securities denominated in currencies other than Hong Kong dollar
3.12 16.22 19.34
Fixed deposits denominated in currencies other than Hong Kong dollar
4.07 － 4.07
Call deposits and balances with custodians denominated in currencies other than Hong Kong dollar
－ 0.36 0.36
Trading financial instruments
- assets － 0.06 0.06
- liabilities － (0.03) (0.03)
21.36 78.64 100.00
The Fund’s external investment managers were as follows:
First State Investments (Hong Kong) Limited
Schroder Investment Management (Hong Kong) Limited State Street Global Advisors Asia Limited
Wellington Management Company LLP
The ten single largest securities holdings in the Fund’s investment portfolios were:
9. AUDITED FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended 31 August 2018 have been audited by the Director of Audit. The audited financial statements together with the auditor’s report will be placed before the Board at the annual general meeting to be held on 16 January 2019.
LEUNG Yin-fun, Fanny
Treasurer Grant Schools Provident Fund
10 January 2019 Equities
HSBC Holdings Plc 81.3
Tencent Holdings Limited 66.9
AIA Group Limited 45.1
China Construction Bank Corporation Limited 39.0
Apple Inc. 35.8
Industrial and Commercial Bank of China Limited 31.6
Microsoft Corporation 26.5
Debt Securities
Industrial and Commercial Bank of China Limited 2.905% 13/11/2020 47.1 China Construction Bank (Asia) Corporation Limited 3.25% 02/07/2019 39.0
Bank of China Limited 2.375% 14/02/2020 31.3
Spread of Net Assets as at 31 August 2018
- 20 -
Equity securities listed in Hong Kong HK$650 million (17.16%)
(2017: 20.79%)
Debt securities denominated in Hong Kong dollar HK$396 million (10.45%) (2017: 10.60%)
Hong Kong dollar deposits, net trading financial instruments and net accounts receivable HK$532 million (14.05%) (2017: 11.24%)
Equity securities listed outside Hong Kong HK$1,316 million (34.74%) (2017: 32.30%)
Deposits denominated in currencies other than
Hong Kong dollar HK$167 million (4.41%) (2017: 6.46%)
Debt securities denominated in currencies other than Hong Kong dollar HK$727 million (19.19%) (2017: 18.61%) TOTAL: HK$3,788 million
(2017: HK$3,622 million)
Report of the Director of Audit
Independent Auditor’s Report
To the Board of Control, Grant Schools Provident Fund
Opinion
I certify that I have audited the financial statements of the Grant Schools Provident Fund set out on pages 24 to 49, which comprise the balance sheet as at 31 August 2018, and the income and expenditure account, reserve fund, statement of changes in net assets available for benefits and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In my opinion, the financial statements of the Grant Schools Provident Fund are prepared, in all material respects, in accordance with rule 15(1) of the Grant Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279) and the accounting policies set out in note 2 to the financial statements.
Basis for opinion
I conducted my audit in accordance with rule 15(2) of the Grant Schools Provident Fund Rules and the Audit Commission auditing standards. My responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of my report. I am independent of the Grant Schools Provident Fund in accordance with those standards, and I have fulfilled my other ethical responsibilities in accordance with those standards. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.
Responsibilities of the Treasurer, Grant Schools Provident Fund for the financial statements
The Treasurer, Grant Schools Provident Fund is responsible for the preparation of the financial statements in accordance with rule 15(1) of the Grant Schools Provident Fund Rules and the accounting policies set out in note 2 to the financial statements, and for such internal control as the Treasurer, Grant Schools Provident Fund determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Treasurer, Grant Schools Provident Fund is responsible for assessing in conjunction with the Board of Control, Grant Schools Provident Fund the ability of the Grant Schools Provident Fund to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.
Auditor’s responsibilities for the audit of the financial statements
My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Audit Commission auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with the Audit Commission auditing standards, I exercise professional judgment and maintain professional skepticism throughout the audit. I also:
— identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
— obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Grant Schools Provident Fund’s internal control;
— evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Treasurer, Grant Schools Provident Fund; and
— conclude on the appropriateness of the Treasurer, Grant Schools Provident Fund’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Grant Schools Provident Fund’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion.
My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Grant Schools Provident Fund to cease to continue as a going concern.
John Chu Audit Commission
Director of Audit 26th Floor
Immigration Tower
7 Gloucester Road
10 January 2019 Wanchai, Hong Kong
GRANT SCHOOLS PROVIDENT FUND BALANCE SHEET
AS AT 31 AUGUST 2018
(Expressed in thousands of Hong Kong dollars)
2018 2017 Note
ASSETS
Cash at banks 9,226 10,897
Investments:
Deposits with banks and other 4 670,978 627,692
financial institutions
Securities 5 3,088,768 2,980,700
Trading financial instruments 6 2,219 1,929 Receivables and other assets 7 37,122 21,490
LIABILITIES
Trading financial instruments 6 (909) (2,184) Payables and other liabilities 8 (19,641) (18,876)
NET ASSETS AVAILABLE FOR BENEFITS 3,787,763 3,621,648
Representing:
Contributors’ account 9 3,090,189 2,972,178
Reserve fund 10 543,090 500,805
Provision for guaranteed dividend 11 154,484 148,665
3,787,763 3,621,648
The notes on pages 29 to 49 form part of these financial statements.
LEUNG Yin-fun, Fanny
Dr SO Ying-lun
Treasurer Chairman
Board of Control
Grant Schools Provident Fund
10 January 2019
GRANT SCHOOLS PROVIDENT FUND
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in thousands of Hong Kong dollars)
2018 2017
Note
INCOME
Interest income 12 34,178 29,325
Dividend income 13 50,352 46,820
Other income 14 25 2,232
84,555 78,377
EXPENDITURE
Supervision fee 15 (1,216) (1,237)
Fees for investment managers (4,431) (3,923)
Fees for custodians (2,319) (2,097)
Investment transaction costs (786) (568)
Other operating expenses (333) (189)
(9,085) (8,014) OPERATING SURPLUS FOR THE YEAR 75,470 70,363
PROPOSED APPROPRIATION FROM 17 79,014 78,302
RESERVE FUND
PROVISION FOR GUARANTEED DIVIDEND 11 (154,484) (148,665) BALANCE AT THE END OF THE YEAR － －
The notes on pages 29 to 49 form part of these financial statements.
GRANT SCHOOLS PROVIDENT FUND
RESERVE FUND FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in thousands of Hong Kong dollars)
2018 2017 Note
Donations and dividends transferred from 16 814 641
contributors’ account
Net realised and revaluation gains/(losses) on:
－ securities 114,825 302,080
－ trading financial instruments 4,418 (5,471)
－ cash and deposits with banks and other 1,261 (533)
financial institutions
120,504 296,076
Proposed appropriation to income and 17 (79,014) (78,302)
expenditure account
Dividends (under)/over-provided in previous year (19) 16
42,285 218,431
Balance brought forward from previous year 500,805 282,374 BALANCE CARRIED FORWARD 543,090 500,805
The notes on pages 29 to 49 form part of these financial statements.
GRANT SCHOOLS PROVIDENT FUND
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in thousands of Hong Kong dollars)
2018 2017
Note
OPERATING SURPLUS FOR THE YEAR 75,470 70,363
Net realised and revaluation gains 120,504 296,076
Contributions from contributors 9 46,031 42,912
Donations from the Government and 9 116,253 109,928
Direct Subsidy Scheme schools
Net transfers (to)/from 9 (8,718) 4,307
Subsidized Schools Provident Fund
Withdrawals by ex-contributors 9 (183,425) (134,230) CHANGES IN NET ASSETS AVAILABLE 166,115 389,356
FOR BENEFITS
NET ASSETS AVAILABLE FOR BENEFITS 3,621,648 3,232,292 AT THE BEGINNING OF THE YEAR
NET ASSETS AVAILABLE FOR BENEFITS 3,787,763 3,621,648 AT THE END OF THE YEAR
The notes on pages 29 to 49 form part of these financial statements.
GRANT SCHOOLS PROVIDENT FUND
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2018 (Expressed in thousands of Hong Kong dollars)
2018 2017 Note
Cash flows from operating activities
Operating surplus for the year 75,470 70,363
Interest income 12 (34,178) (29,325)
Dividend income 13 (50,352) (46,820)
Net realised and revaluation gains 120,504 296,076
Increase in investments in securities (108,068) (433,518)
(Increase)/Decrease in investments in fixed deposits (116,547) 10,859
with original maturities beyond three months
Change in trading financial instruments (1,565) 2,827
(Increase)/Decrease in receivables and other assets (13,365) 5,189
Increase/(Decrease) in payables and other liabilities 3,642 (4,030)
Elimination of foreign exchange differences in
28 (336) revaluation of cash and cash equivalents
Interest received 31,456 27,489
Dividends received 50,864 45,129
Net cash used in operating activities (42,111) (56,097)
Cash flows from financing activities
Contributions from contributors 46,031 42,912 Donations from the Government and 116,253 109,928
Direct Subsidy Scheme schools
Net transfers (to)/from Subsidized Schools (8,718) 4,307
Provident Fund
Withdrawals by ex-contributors (186,359) (131,353) Net cash (used in)/from financing activities (32,793) 25,794 Net decrease in cash and cash equivalents (74,904) (30,303) Cash and cash equivalents at the beginning of the year 97,979 127,946 Effects of exchange rate changes on cash and cash (28) 336
equivalents
Cash and cash equivalents at the end of the year 18 23,047 97,979
The notes on pages 29 to 49 form part of these financial statements.
GRANT SCHOOLS PROVIDENT FUND
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of Hong Kong dollars, unless otherwise stated.)
1. LEGISLATION
The Grant Schools Provident Fund (the Fund) is a retirement scheme governed by the Grant Schools Provident Fund Rules (Fund Rules) made under section 85 of the Education Ordinance (Cap. 279).
2. SIGNIFICANT ACCOUNTING POLICIES (a) Financial reporting framework
The Fund has adopted a financial reporting framework incorporating the requirements of the Fund Rules and applicable requirements of Hong Kong Financial Reporting Standards (HKFRSs), which is a collective term that includes all applicable individual HKFRSs, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). A summary of the significant accounting policies adopted by the Fund is set out below.
(b) Basis of preparation of the financial statements
The measurement basis used in the preparation of the financial statements is historical cost except that investments in securities at fair value and trading financial instruments are stated at their fair value as explained in the accounting policies set out below (see note 2(c)).
The preparation of financial statements in conformity with the financial reporting framework (note 2(a)) requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenditure. The estimates and associated assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
There are no critical accounting judgements involved in the application of the Fund’s accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.
(c) Financial assets and financial liabilities (i) Initial recognition
The Fund classifies its financial assets and financial liabilities into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred.
The categories are: trading financial instruments, securities at fair value, loans and receivables, held-to-maturity securities and other financial liabilities.
Financial assets and financial liabilities are measured initially at fair value, which normally equals to the transaction price, plus transaction costs for loans and receivables, held-to-maturity securities and other financial liabilities that are directly attributable to the acquisition of the financial asset or the issue of the financial liability. Transaction costs on trading financial instruments and securities at fair value are expensed immediately.
The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instruments. Regular way purchases and sales of financial assets are accounted for at trade date.
(ii) Basis of recognition of gains or losses
The Fund has adopted the requirements of Fund Rule 11 to recognise revaluation gains or losses arising from changes in fair value and realised gains or losses on derecognition of financial instruments in the reserve fund (see note 2(c)(iii) and (v)). This is different from the accounting treatment required under HKAS 39 Financial instruments: Recognition and measurement where such gains or losses are recognised in the income and expenditure account.
(iii) Categorisation
Trading financial instruments
These comprise forward currency contracts used by the Fund to manage its risks associated with foreign currency fluctuations.
Such derivative financial instruments do not qualify for hedge accounting and are categorised as “trading” under HKAS 39.
Trading financial instruments are carried at fair value, and presented as assets when the fair value is positive and as liabilities when the fair value is negative. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.
Securities at fair value
Securities at fair value consist of equity and debt securities managed by the Fund’s external investment managers (note 19(a)). These investments are designated upon initial recognition at fair value and carried at fair value under HKAS 39. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised in the reserve fund as revaluation gains or losses in the period in which they arise.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
This category includes cash at banks, deposits with banks and other financial institutions, and receivables and other assets.
Loans and receivables are carried at amortised cost using the effective interest method less impairment losses, if any (note 2(c)(vii)).
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees received or paid between parties to the contract
Held-to-maturity securities
Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturity which the Fund has the positive intention and ability to hold to maturity, other than (a) those that the Fund, upon initial recognition, designates as at fair value; and (b) those that meet the definition of loans and receivables.
Held-to-maturity securities are carried at amortised cost using the effective interest method less impairment losses, if any (note 2(c)(vii)).
Other financial liabilities
These are financial liabilities other than trading financial instruments. They are carried at amortised cost using the effective interest method.
(iv) Fair value measurement principles
The Fund measures its investments in securities and trading financial instruments at fair value at each balance sheet date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, in the most advantageous market for the asset or liability; and the Fund has access to these markets at the measurement date.
The fair value of an asset or a liability is measured with those assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.
The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The Fund measures fair values using the following fair value hierarchy that reflects the significance of inputs used in making the measurements:
Level 1 – fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – fair values are determined with inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 – fair values of financial instruments are determined with inputs that are not based on observable market data (unobservable inputs).
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Fund determines whether transfers between levels in the hierarchy should be reflected in the financial statements by re-assessing categorisation (based on the level of input that is most significant and relevant to the fair value measurement as a whole) at the balance sheet date.
(v) Derecognition
A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.
The Fund uses the weighted average method to determine realised gains and losses to be recognised in the reserve fund on derecognition in accordance with Fund Rules 11(1)(a)(i) and 11(1)(b)(i).
A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or when it expires.
(vi) Offsetting
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously.
(vii) Impairment of financial assets
The carrying amounts of loans and receivables and held-to-maturity securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such
present value of estimated future cash flows discounted at the asset’s original effective interest rate. If in a subsequent period the amount of such impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the reserve fund.
(d) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents include cash at banks, deposits with banks and other financial institutions and short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity when placed or acquired.
(e) Contributions and donations
Contributions are received from contributors and donations are received from the Government and Direct Subsidy Scheme (DSS) schools.
Contributions and donations are recognised on an accrual basis.
(f) Revenue recognition (i) Interest income
Interest income is recognised in the income and expenditure account on an accrual basis, using the effective interest method.
(ii) Dividend income
Dividend income from equity securities is recognised in the income and expenditure account when the share price is quoted ex-dividend.
(iii) Other income
Other income is recognised in the income and expenditure account on an accrual basis.
(g) Foreign currency translation
Foreign currency transactions during the year are translated into Hong Kong dollars using the spot exchange rates at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the closing exchange rates at the balance sheet date. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), all foreign currency translation differences are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.
3. CHANGES IN ACCOUNTING POLICIES
The HKICPA has issued a number of new and revised HKFRSs which are effective for the current accounting period. There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of these developments. The Fund has not applied any new standard that is not yet effective for the current accounting period (note 21).
4. DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS
2018 2017
Fixed deposits denominated in:
－ Hong Kong dollar 504,260 393,290
－ US dollar 152,897 221,668
Call deposits and balances with custodians denominated in currencies other than Hong Kong dollar:
－ US dollar 11,517 11,974
－ other currencies 2,304 760
670,978 627,692
5. SECURITIES
(a) Details
2018 2017
Securities at fair value
Equity securities listed in Hong Kong 649,388 752,932 Equity securities listed outside Hong Kong 1,316,035 1,169,645
1,965,423 1,922,577 Debt securities denominated in:
－ Hong Kong dollar 367,560 355,723
－ US dollar 274,113 276,257
－ other currencies 335,782 317,628
977,455 949,608
Subtotal for securities at fair value 2,942,878 2,872,185
Held-to-maturity securities at amortised cost
Debt securities denominated in:
－ Hong Kong dollar 28,480 28,740
－ US dollar 117,410 79,775
Subtotal for held-to-maturity securities 145,890 108,515 3,088,768 2,980,700
(b) Securities holdings exceeding 5% of the asset class as at 31 August
2018 2017
Fair % of Fair % of Issuer Class value class value class
United States Treasury Debt securities 111,516 9.93% 59,226 5.60%
Government of Japan Debt securities 72,212 6.43% 83,106 7.85%
Government of the Hong Kong Special Administrative Region
Debt securities 47,631 4.24% 74,745 7.06%
6. TRADING FINANCIAL INSTRUMENTS
2018 2017
Assets Liabilities Assets Liabilities Forward currency
contracts, at fair value
2,219 909 1,929 2,184
All these forward currency contracts would mature within one year and had a total notional amount of HK$1,507.8 million as at 31 August 2018 (2017: HK$1,396.3 million). The notional amounts of these contracts indicate the volume of outstanding transactions and do not represent the amounts at risk.
7. RECEIVABLES AND OTHER ASSETS
2018 2017
Proceeds receivable from investments sold 19,803 6,401
Interest and dividends receivable 17,248 15,038
Other debtors 71 51
37,122 21,490
8. PAYABLES AND OTHER LIABILITIES
2018 2017
Unsettled purchases of investments 16,875 13,135 Amount due to the Government of the Hong Kong
Special Administrative Region 1,216 1,237
Fees for investment managers 1,088 1,073
Amount due to ex-contributors － 2,877
Fees for custodians 458 493
Other creditors and accruals 4 61
19,641 18,876 All these liabilities are payable within one year.
9. CONTRIBUTORS’ ACCOUNT
2018
Contributions
Donations from the Government and DSS
schools Dividends Total
Additions for the year 46,031 116,253 148,684 310,968
Net transfers to Subsidized Schools
Provident Fund (700) (2,613) (5,405) (8,718)
Withdrawals by ex-contributors (28,417) (61,970) (93,038) (183,425)
Transfers to reserve fund in accordance with Fund Rule 11(1)(a)(ii)
－ (709) (105) (814)
Net additions for the year 16,914 50,961 50,136 118,011
Balance brought forward from previous year 544,887 1,169,165 1,258,126 2,972,178 Balance carried forward 561,801 1,220,126 1,308,262 3,090,189
2017
Contributions
Donations from the Government and DSS
schools Dividends Total Additions for the year 42,912 109,928 140,306 293,146
Net transfers from Subsidized Schools
Provident Fund 859 1,723 1,725 4,307
Withdrawals by ex-contributors (18,990) (42,870) (72,370) (134,230)
Transfers to reserve fund in accordance
with Fund Rule 11(1)(a)(ii) － (554) (87) (641)
Net additions for the year 24,781 68,227 69,574 162,582
Balance brought forward from previous year 520,106 1,100,938 1,188,552 2,809,596 Balance carried forward 544,887 1,169,165 1,258,126 2,972,178
Donations from DSS schools for the year amounted to HK$33.8 million (2017: HK$32.7 million).
An analysis of the withdrawals by ex-contributors is shown below:
2018 2017
Retirement 99,537 78,597
Resignation 73,286 50,117
Death and ill health 3,125 5,468
Others (such as contract termination and schools ceasing to be grant schools or DSS schools)
7,477 48
183,425 134,230
Vested contributors’ benefits as at 31 August 2018 amounted to HK$3,077.5 million (2017: HK$2,961.1 million). This amount represents the sum which would be payable to contributors had all contributors left the Fund at that date.
10. RESERVE FUND
The reserve fund is maintained in accordance with Fund Rule 11.
11. PROVISION FOR GUARANTEED DIVIDEND
The amount represents the provision under Fund Rule 12 for the guaranteed dividend of 5% of the balance of the contributors’ account which was open for the entire financial year ended 31 August 2018 and Fund Rule 14 for payment of pro rata dividends in respect of contributors’ account which was not open for the entire financial year.
Fund Rule 12 provides that, where in any year the guaranteed dividend of 5%
cannot be met by the Fund, the Financial Secretary may direct that an interest-free Government loan be paid to the Fund out of the general revenue to cover the balance of the guaranteed dividend which cannot be met. No such Government loan had been paid to the Fund for the year ended 31 August 2018 (2017: Nil) as the shortfall between the guaranteed dividend and the operating surplus was met by a transfer from the reserve fund (see note 17).
12. INTEREST INCOME
2018 2017 Interest income from:
Debt securities at fair value 20,878 18,886
Held-to-maturity securities 3,692 2,503
Deposits denominated in:
－ Hong Kong dollar 5,997 3,552
－ US dollar 3,607 2,920
－ other currencies 4 1,464
9,608 7,936
34,178 29,325
13. DIVIDEND INCOME
2018 2017 Dividend income from equity securities
listed:
－ in Hong Kong 21,198 22,022
－ outside Hong Kong 29,154 24,798
50,352 46,820
14. OTHER INCOME
2018 2017
Tax refund － 2,070
Compensations 25 162
25 2,232
15. SUPERVISION FEE
This represents the provision for the supervision fee for the year ended 31 August 2018 payable to the Government of the Hong Kong Special Administrative Region under Fund Rule 6(2) in respect of the costs incurred in administering the Fund.
16. DONATIONS AND DIVIDENDS TRANSFERRED FROM CONTRIBUTORS’
ACCOUNT
Under Fund Rule 13, whenever a contributor with less than 10 years continuous contributory service ceases to be employed as a teacher in a grant school or DSS school (as the case may be), his account shall be closed and the payment due to him shall include a percentage of all Government donations and DSS school donations (if any) and all dividends that have been declared on such donations.
Donations and dividends not payable to him are transferred to the reserve fund in accordance with Fund Rule 11(1)(a)(ii).
17. PROPOSED APPROPRIATION FROM RESERVE FUND / TO INCOME AND EXPENDITURE ACCOUNT
In accordance with Fund Rule 11(3) and subject to the approval of the Board of Control, it is proposed to transfer a sum of HK$79.0 million (2017: HK$78.3 million) from the reserve fund to the income and expenditure account. The transfer is to cover the shortfall of the operating surplus in meeting the provision of the 5% guaranteed dividend of HK$154.5 million (2017: HK$148.7 million).
18. ANALYSIS OF CASH AND CASH EQUIVALENTS
2018 2017
Fixed deposits with original maturities within three
months
－ 74,348
Cash at banks and call deposits and balances with custodians
23,047 23,631
TOTAL 23,047 97,979
Reconciliation with the balance sheet:
Amounts shown in the balance sheet
Cash at banks 9,226 10,897
Deposits with banks and other financial institutions 670,978 627,692 680,204 638,589 Less: Amounts with original maturities beyond three
months (657,157) (540,610)
Cash and cash equivalents in the statement of cash
flows 23,047 97,979
19. FINANCIAL RISK MANAGEMENT (a) Investment management and control
The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under Fund Rule 6(1). The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary.
All sums considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.
The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.
Each year the Board approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.
The investment management and control of the Fund are set out in a documented risk management and investment strategy and reviewed on a regular basis by the Board.
(b) Market risk
Market risk is the risk that changes in market variables such as equity prices, interest rates and currency exchange rates may affect the fair value or cash flows of a financial instrument.
(i) Equity price risk
Equity price risk is the risk of loss arising from changes in equity prices. The Fund’s investments in equity securities are subject to the equity price risk inherent in all equity securities i.e. the value of holdings may fall as well as rise. As at 31 August 2018, the equity securities were included in securities as shown in note 5. The risk is primarily addressed through diversification of investment portfolio in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.
It was estimated that, as at 31 August 2018, a 10% increase/decrease in the market bid prices of the equity securities, with all other variables held constant, would increase/decrease the revaluation gains recognised in the reserve fund for the year by HK$196.5
(ii) Interest rate risk
Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.
Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since a substantial portion of the Fund’s debt securities and all of its deposits with banks and other financial institutions bear interest at fixed rates, their fair values will fall when market interest rates increase. Investments in debt securities are made in accordance with a documented risk management and investment strategy, and the Fund monitors the fair value interest rate risk on a continuous basis.
It was estimated that, as at 31 August 2018 a 100 basis points increase/decrease in interest rates, with all other variables held constant, would decrease/increase the revaluation gains on the debt securities at fair value recognised in the reserve fund for the year by HK$58.9 million (2017: decrease/increase the revaluation gains by HK$56.1 million). As regards held-to-maturity securities, deposits with banks and other financial institutions, since they are all stated at amortised cost, their carrying amounts will not be affected by changes in market interest rates.
Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund does not have a significant exposure to cash flow interest rate risk because only a small portion of its debt securities bear interest at rates determined by reference to market interest rates.
(iii) Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in currency exchange rates. The Fund’s investments denominated in foreign currencies are exposed to currency risk. The Fund only makes investments denominated in Hong Kong dollar, US dollar and currencies of countries whose foreign currency long-term debt has a high credit rating. The Fund’s exposure to currency risk is handled in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.
The net exposure to each currency at the balance sheet date arising from recognised assets and liabilities after taking into account the effect of forward currency contracts is shown below:
2018 2017
Hong Kong dollar 1,856,419 1,791,645
US dollar 1,245,403 1,211,450
Euro 238,347 234,934
Japanese yen 204,613 149,241
Pound sterling 91,451 86,990
Others 151,530 147,388
3,787,763 3,621,648
It was estimated that, as at 31 August 2018, with all other variables held constant:
a 0.5% increase/decrease in the exchange rate of US dollar against Hong Kong dollar would increase/decrease the net revaluation gains recognised in the reserve fund for the year by HK$6.2 million (2017: increase/decrease the net revaluation gains by HK$6.1 million); and
a 5% increase/decrease in the exchange rates of other currencies against Hong Kong dollar would increase/decrease the net revaluation gains recognised in the reserve fund for the year by HK$34.3 million (2017:
increase/decrease the net revaluation gains by HK$30.9 million).
(c) Credit risk
Credit risk is the risk that an issuer or a counterparty will cause a financial loss to the Fund by failing to discharge an obligation.
Investments in debt securities, trading financial instruments, and loans and receivables are potentially subject to credit risk. The Fund selects issuer or counterparty with good credit standing, strong financial strength and sizeable capital. The Fund also limits the individual exposure, in accordance with a documented risk management and investment strategy.
Hence the Fund does not have significant exposures to or concentration
The Fund monitors credit risk on a continuous basis. The maximum exposure to credit risk at the balance sheet date without taking account of collateral held or other credit enhancements, if any, is shown below:
2018 2017
Cash at banks 9,226 10,897
Deposits with banks and other
financial institutions 670,978 627,692
Debt securities 1,123,345 1,058,123
Trading financial instruments 2,219 1,929
Receivables and other assets 37,122 21,490
1,842,890 1,720,131
The credit quality of cash at banks, deposits with banks and other financial institutions and debt securities, analysed by the ratings designated by Moody’s or their equivalents, at the balance sheet date is shown below:
2018 2017 Cash at banks and deposits with banks and other
financial institutions, by credit rating
Aa1 to Aa3 163,068 96,427
A1 to A3 517,136 542,162
680,204 638,589
Debt securities, by credit rating
Aaa 236,206 268,669
Aa1 to Aa3 336,150 245,351
A1 to A3 495,957 484,253
Baa1 to Baa3 55,032 59,850
1,123,345 1,058,123
(d) Liquidity risk
Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund monitors the liquidity requirements on a continuous basis and
